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You can contact the author (Teguh Hidayat) by email, teguh.idx@gmail.com. The author live in Jakarta, Indonesia.

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Delta Dunia Makmur, Debt Problem

In 2006, David Bonderman, the boss of the
largest private equity firm in the world, Texas Pacific Group (TPG), visited
Indonesia to seek investment opportunities, along with a
young man who was 30 years old, Patrick Sugito Walujo, an owner of a local private equity firm, Northstar Equity Partners.
Bonderman and Patrick previously had known each other when Patrick worked for
Goldman Sachs in New York. After several meetings, Mr.
Patrick had convinced Bonderman that he was the right partner for TPG to invest in Indonesia. So, they both later
founded Northstar Pacific Partners, a holding company that is used to establish or acquired several companies, notably Bank BTPN (BTPN), and Bukit Makmur Mandiri Utama (BUMA), which
is listed on the Indonesian stock market/IDX through its parent
company, DeltaDunia Makmur (DOID).

A few years later, the investments started gaining profits. The most successful investment is probably BTPN, which has now become one ofbanks with the best performance in the IDX. But how about DOID? Well, we could say that Mr. Patrick is a little slipped in DOID, as until the third quarter of 2012, the company was still recorded negative
performance with a net loss Rp353 billion, up significantly from the previous
year amounting to Rp12 billion. If only DOID was able to record the good performance just like Bank BTPN, then it was not impossible
that the name of Patrick Sugito Walujo would appear in the list of Forbes Magazine, as one of the 40 richest people in Indonesia.

However, until now there has been no sign that
Northstar will be out from DOID, but rather go deeper by increasing its capital amounting to Rp1.2 trillion in mid-2011
(through a rights issue). On the other hand, for retail
investors, DOID starting to look attractive after the decline of its stock stopped in the 150's, then it back to 240. So, it is time to buy the stock? Before answering that question,
let us check the company’s
fundamentals.

Logo of Bukit Makmur Mandiri Utama, a subsidiary of DOID

The story begins in 2008, when Mr. Patrick took over a coal mining contractor company, PT Bukit Makmur Mandiri Utama (BUMA),
fromanother young businessman named Jimmy Budiarto (owner of J Resources Asia Pacific /
PSAB). The value of the acquisition were not disclosed,
but some say US$ 200 million. A year later,
precisely in November 2009, Northstar acquired a
small property company in the stock exchange, DOID, to be used as a backdoor
listing object for BUMA, which then DOID acquired BUMA (BUMA became a subsidiary of DOID) with a acquisition value of US$ 240 million. DOID then changed its status from the property company into a coal mining
contractorcompany, as at the same
time DOID sold off its assets in the property
sector.

Unlike the other backdoor-listing-companies that usually
hold a rights issue after the acquisition is completed, DOID held no rights issue but took the debt from the
bank. In May 2011, BUMA signed a syndicated loan facility of US$ 800 million
from eleven banks, namely Bank Mandiri and the rest are foreign banks. Few months later, ie in August 2011, BUMA also
obtained a loan from Bank CIMB Niaga amounting to US$ 25 million, bringing the
total loan of US$ 825 million or equivalent to Rp8 trillion, all of which are
used for working capital and debt refinancing. The majority of these loans are
long-term loans that will mature in 2018 and 2019, and bearing interest rate of 2.7 - 4.6% per annum.

Related to the debt, then
there are some things that become difficulties for BUMA (or in this case DOID) to be able to make profits. First, the amount of debt taken was very
large, one of which is due to debt refinancing. When Northstar Group took over BUMA in 2008, the company had already a debt of US$ 310 million. The debt then paid by issuance of bonds at a value of US$ 315 million in the
same month when BUMA placed under DOID, ie November 2009, and one-half years
later the refinancing process is
continued where BUMA took long-term bank debts totaling US$ 825 million, as already mentioned above. If only Northstar not to bear the innate debt of BUMA, then thebank debt taken by BUMA
for capital expenditure (under the new management) might be only
about US$ 500 million (although the numberis still a large
amount, because the assets of
BUMA before acquired by Northstar was only around US$ 400
million, including its debts).

Second, the aftermaths of the debts are as follows:

DOID
must pay large on interest. Until the third
quarter 2012, DOID spend Rp365 billiononly to pay interest on the loan. While as already mentioned above, the interest
rate of the loans borne by the company is
actually relatively low, ie less than 5% per annum.

Since
the company's operating profit before non-operating expenses (including interest expense) and taxes was only Rp459 billion(up to the
third quarter 2012), then the interest expense of Rp365 billion was certainly very large.

Plus
losses due to foreign exchange (because DOID gained its revenue in Rupiah, while its debts are denominated
in U.S. Dollars), where the loss is
increasing every time the Rupiah weakened against the U.S.
Dollar, then DOID ultimately unable to record someprofits, but net losses of Rp353 billion in
Nine Months 2012.

And
because the company till now are not able to make profits, so far DOID only
focus on debt
refinancing (taking on new debt to pay the old ones) to obtain a cheaper interest rates, and there is no repayment efforts, perhaps at all.
As a result, the percentage of interest rate of the loans was successfully decline from
11 - 12% to less than 5% per annum, but the
value of the loan itself is not reduces at
all.

The problem here is, if DOID (or in this case
BUMA) is not able to increase its revenue and operating profit to cover interest expense andloss of foreign exchange, then of course the company's
net income will continue to be minus. On the other hand, BUMA is still need
huge cash for
working capital, so even if the company sometime is
able to make net profit, the generated retained earnings will not be used
to pay debts, but for capital expenditure (capex). For the year 2012, BUMA spend up to US$ 300 million for capital
expenditure, increasedsubstantially from US$ 220 million in 2011.

And if Northstar does
not add Rp1.2 trillion of
capital into DOID’ equities from its rights issue, then the net capital of DOID should have been minus aka
capital deficiency, because the deficit has reached Rp716 billion, up from the
previous amount of Rp363 billion.

The conclusion? Well, I have not seen a light
here. Because the analogy is simple: If you have a company with some debt, which the net income od the company does not even cover the cost of interest alone,
then how you will pay off the debt? The option of more refinancingis also seems impossible, because the interest rate borne by the
company has been quite low in the level of 5% per annum, so it could notbe lower.

So, the only solution is to continue to
increase revenue and operating profit. But how? Well, unfortunately the company
does not explainedabout any forward measures that will be carried to
increase revenue, which maybe it is because since the
beginning BUMA is already one of the largest mining
contractor in Indonesia (actually the second largest, after Pamapersada
Nusantara), with its first-class customers like Berau Coal, Kideco, Adaro, Bayan, Arutmin, and Kaltim Prima Coal / KPC. I mean, if BUMA
want to increase their revenue
to be more than
doubled, for example, then perhaps they need to expand into overseas, let say China or Australia, because most of the giant
coal companies in Indonesia are already users of their services. BUMA could
probably just sell mining services to the small coal minings inKalimantan, but the revenue will certainly not
be as big as revenue from Berau et al.

If acquiring new
customers is seems hard to do,
then the other option might be to acquire coal mining to obtain new sources of revenue, and that's what the company does. In last October 2012, DOID acquired two coal mining
companies which are not yet in production, namely PT
Banyu Biru Sakti (BBS), and PT Pulau
Mutiara Persada (PMP), with an acquisition value of Rp162 billion in total. There are no data on coal reserves owned by
the two companies, but BBS and
PMP has mining
concessions covering an area of ​​over 7,500 and ​​3,500 hectares respectively, located in East Kalimantan and Jambi. Well, we'll see how it goes.

In conclusion, if in last June 2011 I said that DOID could not be recommended, so this time I would say the same thing: DOID can not be recommended,
even though at the current price (240). At first, I had
hoped that maybe DOID at the
price of 200's was quite interesting, considering the stock was also rebounded yesterday. But unfortunately, its PBV by the price of 240 is still high, at 2.2 times, and its PER is also a minus because net income is negative.

However, if you still believe in Northstar Group, particularly Mr. Patrick in terms BUMA and DOID, then you can continue to monitor the
development of DOID’ performance from
time to time. BUMA is actually a good company, witha mining contracts value of approximately US$ 5 billion, or
nearly reached Rp50 trillion. But the company is seemed wrong in the management of its leverage,
and it's not entirely the fault of Northstar Group, given that BUMA has already in huge debt since before it was
acquired. So let's see, what Northstar
would do next.

At first, I also had thought that Mr. Patrick was a bit tricky because he puts BUMA behind DOID. But now, as far as I could see,
Mr. Patrick seems to be a conservative businessman,
similar enough to the Salim Group, but very
different from the Bakrie Group.